Introduction
According to figures from the IMA, Europe was the fourth most popular region for net retail sales of equity funds in June this year, clocking up £74m of sales, behind the UK, global region and Japan.
The reforms to pensions unveiled by chancellor George Osborne in his Budget earlier in the year have also prompted investors to consider where they can find income in retirement. UK equity income funds have proved consistently popular among investors but attention has now turned to European equity income more recently.
The European recovery may be lagging the US but there are plenty of positive signs emerging from the region.
Stephen Cohen, chief investment strategist at BlackRock International Fixed Income and iShares EMEA, believes there is value to be found in European equities and forecasts a positive earnings outlook for Europe.
“There is a recovery momentum in Europe, albeit a fragile one,” he says.
“The pick-up in leading indicators points to a positive earnings outlook ahead and second-quarter reporting is off to a better start compared to prior quarters. European energy producers should benefit from the risk premium in oil price supported by supply disruptions in Iraq, Nigeria and Libya.”
But he points to the lack of inflation in Europe as an ongoing concern. Indeed, markets and investors have been waiting for the European Central Bank (ECB) to respond to the threat of deflation for some time now.
The eurozone’s inflation rate was unchanged in June at 0.5 per cent, below the ECB’s inflation target of roughly 2 per cent and thereby putting further pressure on ECB president Mario Draghi to act.
The fragile nature of the recovery in Europe is underscored by data showing that industrial production shrunk 1.1 per cent in May 2014.
Nevertheless, the UBS House View report for July 2014 reveals an overweight to eurozone equities on the basis of the recovery of economic growth.
Markus Irngartinger, a strategist at UBS AG, and Carsten Schlufter, an analyst at the same firm, note: “The region’s economic growth momentum, combined with an uptick in global manufacturing, bodes well for the eurozone corporate earnings outlook.
“We prefer the consumer discretionary sector, as it offers good revenue and earnings growth and generates high free cashflow.”
They add that financials are offering attractive valuations and “superior” earnings growth, while utilities are cheap and likely to see earnings increase.
Joerg de Vries-Hippen, co-manager of the Allianz European Equity Income fund, has an overall positive outlook for European equity income. He points to high dividend yields in Europe compared to other markets and also to the region’s own history.
“The underlying quality of Europe is good,” Mr de Vries-Hippen adds. “The situation with regards to the crisis is being addressed more and more, and economic development is good.”
The picks
BlackRock Continental European Income fund
This £421m fund is run by co-managers Alice Gaskell and Andreas Zoellinger, with the aim of achieving an above-average income from its equity investments compared to the income yield of European equity markets excluding the UK. The portfolio’s biggest sector exposure is to financials at 26.7 per cent, followed by industrials, which comprise 16.7 per cent of the fund. Over three years to July 29 2014, the fund returned 50.72 per cent to investors, according to FE Analytics. While the fund’s performance dropped to second quartile over three years, solid returns means this could be one for investors.
JP Morgan European IT Income
Alexander Fitzalan Howard, Stephen Macklow-Smith and Michael Barakos are behind this £94.9m investment trust that aims to provide growing income from a diversified portfolio of investments in continental European stockmarkets. Among the trust’s top holdings are Nestlé, Siemens and BNP Paribas. In the five years to July 29 2014, the vehicle delivered a 104.89 per cent return, placing it top quartile in the AIC Europe sector. It has achieved top quartile performance across one and three years.
Editor’s pick
F&C European Growth & Income fund
Mark Nichols’ European Growth & Income fund targets companies with strong cashflows, good growth prospects and a focus on shareholder returns. The £403.1m portfolio is constructed using a high conviction, bottom-up approach that F&C claims results in low levels of turnover. Deputy manager David Moss assists Mr Nichols. Across 10 years to July 29, the fund has clocked an impressive return of 144.95 per cent for investors, according to FE Analytics. Among the top 10 holdings in the portfolio are Novartis, Allianz and Wolters Kluwer.
